2023-05-16 21:32:11 ET
Summary
- JELD 1Q23 EPS of $0.35 and adjusted EBITDA of $94 million outperformed consensus estimates.
- 1Q23 performance was encouraging; there are uncertainties for the remainder of FY23.
- Efforts to streamline operations, reduce physical footprint, and implement a centralized logistics program are expected to enhance margins and generate further cost savings.
Summary
JELD-WEN Holding ( JELD ) is one of the world's largest door and window manufacturers, designing, manufacturing, and distributing interior and exterior doors, as well as wood, vinyl, and aluminum windows for new construction, repair, and remodeling. The company has gotten off to a good start this year, but I see the near-future as still being somewhat uncertain. Results from the 1Q23 showed marked improvement in the company's efforts to streamline operations. Previously communicated initiatives are progressing as planned, and alongside them, new strategies are being introduced to enhance logistics and production processes. However, the challenging operating environment and inflation have made it hard for JELD to perform, especially when it is one of the largest player in the industry, making it very exposed to the new construction and rebuild and remodel market. Furthermore, the stock is trading at a valuation of 7.5x forward EBITDA, which is the company's 10-year average and indicates there is no valuation margin of safety. Taking into account its positives and negatives, I think it's prudent to maintain a neutral stance until JELD stock's valuation gets cheaper.
1Q23 results
JELD released its 1Q23 financial results, demonstrating strong performance that surpassed market's expectations. The company reported an operating EPS of $0.35 , significantly exceeding consensus forecast of $0.06. Additionally, JELD achieved a 1Q adjusted EBITDA of $94 million, surpassing consensus $64 million. Notably, North America margins performed exceptionally well, reaching 10.3%. Europe also performed relatively well with margins at 5.6% and modest decline in sales. Furthermore, JELD provided an update on its FY23 guidance, which was a guide down in adjusted EBITDA forecast to a range of $330-$370 million, compared to the previous guidance of $360-$400 million on a reported basis (but it should be $300 to $340 million once adjusted for the exclusion of Australasia). The revised guidance for 2023 reflects an increase due to the positive 1Q performance and the ongoing efforts to reduce costs.
Demand outlook
While 1Q23 revenue did well, there seems to be a mixed outlook for the rest of FY23. Management stated that 1Q23 North American sales were boosted by a mix shift of 2% to 3%, but true volume decreased by 6% to 7%. I think this reflects the caution of many retailers, who aren't stocking up for the summer build (something management hasn't noticed happening, either). As such, volume could be pushed over from 1Q to 2Q instead. However, on the flipside, the typical seasonality might not be as strong as the current high inflation rates have cut into discretionary spending as consumer shores up more cash in the bank. With lesser demand, retailers are likely to stock up lesser inventories, which ultimately impacts JELD. I believe this macro environment has severely limited management ability to be confident about FY23. The same thing seems to be happening in Europe, where the residential market is still struggling, with some northern European markets falling by as much as 40-50% year-over-year in 1Q23. While stable commercial volumes bolstered results, I anticipate a slowdown in activity for 2H23 as a result of diminishing backlogs. When taken as a whole, these indicators suggest JELD will face a challenging volume environment for the remainder of FY23. As the high inflation environment continues to reduce volume for all players, pricing will become an additional issue in addition to volume. It's possible that struggling smaller businesses will lower prices to attract more customers. This would be disastrous for JELD's bottom line in two ways: it would reduce sales volume and force the company to lower prices.
Margin / cost savings
After a period of mediocre performance, the current management team has shown marked improvement and has been extremely focused on cutting costs. I find it encouraging that JELD still anticipates savings of $100 million this year thanks to the measures that have already been put in place. For instance, JELD is reducing its physical footprint by relocating production to be closer to customers and closing a door facility in Atlanta. The effects of lower volumes on margins are expected to be neutralized, according to management, by these cost reductions, which will be 2H23-weighted. I also anticipate further cost reductions and margin enhancement as JELD rolls out the new centralized logistics program in North America, which is expected to generate $15 million in annual savings over time. Altogether, JELD should enjoy another $30 million of profit improvement in 2024, which should push margin further upwards.
Valuation
While the margin outlook appears to be positive, the weak FY23 demand forecast has caused me to require more margin of safety from a valuation standpoint. JELD's valuation of 7.5x forward EBITDA does not provide this. It is also currently trading at a premium to Masonite International ( DOOR ), which has a higher margin and a lower leverage ratio. Given all of these near-term uncertainties, my concern is that JELD's top-line performance will be weaker than expected. If this occurs, valuations may fall as a result of negative market sentiment. However, I do not advocate selling the stock entirely. I believe that the current management team's efforts will structurally improve the business's profitability over time, and that the short-term concerns will be resolved as the economy recovers.
Conclusion
JELD delivered impressive 1Q23 results, surpassing expectations. However, uncertainties loom in the near future due to challenging operating conditions and inflationary pressures. The demand outlook presents a mixed picture, with cautious retailers and high inflation affecting both volume and pricing dynamics. Meanwhile, the European residential market continues to struggle, and commercial volumes are anticipated to decline. Importantly, the stock's current valuation, standing at 7.5x forward EBITDA, lacks the desired margin of safety I require. As such, I recommend adopting a neutral rating for now.
For further details see:
JELD-WEN Holding: Weak FY23 Outlook And Lack Of Margin Of Safety